Our post-COVID economy is not making retirement planning easier. Thanks to stock market volatility and an uncertain economy, millions of job losses, and the threat of the pandemic spreading—many Americans are facing tough financial times. COVID-19 is also effectively reshaping retirement planning as we know it. Thankfully, the federal government created provisions in the CARES Act to help. You can take advantage of these provisions if you need to. But, you should also consider strategies help keep your retirement savings plan on track.
Early hardship withdrawals incur no penalty in 2020 for COVID-related expenses.
If you’re under 59 ½, you can take an early distribution in 2020 of up to $100,000 (per person, not per plan) from eligible retirement plans—without incurring the 10 percent penalty as you would have before COVID. This provision includes withdrawals from plans like 401(k)s, 403(b)s, 457s, and traditional IRAs. Additionally, if you take funds from a 401(k) or other employer-sponsored plan, the 20 percent withholding is waived in 2020. However, to do so without penalty, you must prove you’re using the funds strictly for COVID-related expenses.
Regardless of which of the above moves you make, it’s crucial to understand that even though the early withdrawal and withholding penalties are waived, you’ll still owe taxes on any early withdrawal. Now, the IRS is giving broad options for you to pay those taxes: you can spread the payments over a three-year period or pay it all in 2020. You can also redeposit the withdrawn funds within three years to avoid paying tax.
Understand that employer-sponsored plans are not required to adhere to this provision. So, make sure you consult with your employer and/or plan administrator before taking money from your plan.
Note: The ability to withdraw money from your retirement plan without penalty may help you financially today—but understand doing so can impact the retirement income you have in the future. This is critical. So, balance your withdrawals you need to get you through these tough times accordingly. Don’t deplete your savings so that you may not have the funds to retire on schedule.
There are relaxed rules for taking loans from your retirement plans in 2020.
From March 27, 2020 through September 23, 2020, the dollar limit for a loan from your employer-sponsored plan has been raised. If your employer allows it, you may now take the lesser of 100 percent of your plan’s vested balance or $100,000. Plans such as 401(k)s, 403(b)s, and 457 plans are eligible for this provision. And, these funds can be used for anything—they are not limited to COVID-related expenses.
If you decide to take a loan from your plan, understand these rules:
- You have five years to repay the loan.
- You don’t have to begin making repayments until 2021, though. Typically, the five-year clock begins the year you take out a loan, but the CARES Act is allowing a bit of relief here, too.
- However, your loan will begin accruing interest in 2020, so keep that in mind. The sooner you can repay those funds, the easier it will be to get back on your retirement planning track.
The CARES Act also waived your 2020 RMD.
If you’re already retired, you know you must take required minimum distributions from your retirement plan. But, for 2020, if you don’t need the money, you don’t have to take that RMD. Not doing so is a good move. It leaves more money in your retirement plan to increase capital and take advantage of compound interest. This can help recoup some of any losses your account may have suffered during the stock market volatility the past few months.
Businesses may limit retirement benefits or stop offering them altogether.
Many businesses were forced to close their doors for good, unable to withstand the financial impact that has swept the nation. Those able to remain open are having to rethink their financial strategies, and retirement benefits are on the hit list. Companies may simply not be able to afford to offer profit-sharing or matching contributions anymore. So, expect employer contributions to be reduced, if not eliminated altogether.
Open an individual IRA or solo 401(k).
If your employer no longer offers retirement benefits, you can open your own IRA and make contributions. Traditional and Roth IRAs allow $6,000 in annual contributions, along with a $1000 additional catch-up contribution if you’re 50 and over. If you’re self-employed, you can take advantage of higher contribution limits of 401(k)s as an employee. You can also contribute an employer profit-sharing portion, as well, which increases your savings potential.
These are uncertain economic times for many. Thankfully, the government is making moves to relieve the financial burden from COVID-19 as much as possible. In the end, it’s up to you to decide whether or not you need to take advantage of the CARES Act provisions. Your financial advisor can help you navigate these critical decisions. If you’ve lost your job due to COVID, or if your employer has eliminated retirement planning benefits, you have options to open individual retirement accounts. This can help you maintain your savings and help you secure a comfortable retirement future.
This article was written for informational purposes only and should not in any way be considered as financial, tax, or legal advice. Consult with the appropriate professionals to help you decide on any actions you are eligible to take regarding the above CARES Act provisions.